Should you renew your PPF account or invest in mutual funds?
A Step-by-step guide for PPF account holders approaching maturity in April. This post shows how to decide between extension vs. withdrawal.
A Step-by-step guide for PPF account holders approaching maturity in April. This post shows how to decide between extension vs. withdrawal.
A PPF account matures on 1st April after 15 years from the end of the financial year of opening. This rule works like this:
This article has more examples of PPF maturity date calculations: When does a PPF account mature?.
Note: Your PPF will mature on 1Apr22 only if you have opened the account between 1Apr08 and 31Mar09. You need to put an extension request between 1Apr22 and 31Mar23.
This post will show the precise steps to decide whether you should continue the PPF account or withdraw to invest in mutual funds or use the amount for other purposes.
Join the Arthgyaan WhatsApp community: You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.PPF accounts will mature in 15 years but need not be closed immediately. A matured account will keep earning interest if there is any balance. The following rules govern PPF extension:
We need to keep in mind that a PPF account can be kept active with just ā¹500/year of investment. Hence, the problem essentially simplifies to:
The question of PPF withdrawal only makes sense in the context of having a proper plan for retirement or other goals against which the PPF account has been tagged as an investment. If you have not done that yet, please follow the goal-setting process first: How do you get the SIP amount for a complete portfolio.
You need to have the following information with you:
Using the information gathered in the previous step, you can use the goal-based investing template to figure out the current and target asset allocation for your goals. The basic premise here is that:
The goal-based investing template will give you three outputs:
The process of setting goals and figuring out the asset allocation of each is covered in detail in this post: I am now ready to do goal-based investing. What now?
The rest is straightforward once the asset allocation is known using the goal-based investing template. There are the following cases:
If there are significant goals, like childrenās college education due soon, say within the next five years, then some or most of the PPF amount should be diverted to short-duration debt funds as a lump sum.
Many investors will be in this bucket if they have started with a high allocation to debt assets like PPF and EPF and started equity investing very late. An alternative way to reach this stage is a relatively large fall in the equity markets in the months leading to the PPF maturity.
In this case, you should fix the asset allocation by using a majority of the PPF maturity amount to invest in equity assets. You can follow this guide on investing a lump sum amount into equity by investing first in a debt mutual fund and running an STP as per this post: SIP vs. lump sum: how to invest into equity?.
The post-March 2020 or similar bull market could have led to cases where the equity allocation has ballooned, leading to an excessive amount of assets in equity. This situation will require an immediate risk reduction by selling equity and getting into suitable debt assets from this list: How to choose debt instruments for retirement?.
You should extend the PPF account with fresh investments per the SIP amount allotted to debt assets.
We consider a few case studies with variations of time left until retirement, income stability, and goals due in the next five years. In each situation below the investor should carefully understand their risk profile and income potential for the next ten to fifteen years. There would be a complex interplay between risk taking willingness (āwantā to take riskā), risk taking ability (ācanā take risk) and risk taking requirement (āneedā to take risk) that needs to be considered. A primer on this concept of risk profiling along with a profiling tool to determine your risk profile is discussed here: Do not invest in mutual funds before doing this.
Retired investors should reconsider the lure of guaranteed returns of PPF vs the need to balance inflation in the portfolio. We recommend that the retired investor take this ample cash infusion opportunity and create a three-bucket portfolio. You need to make three buckets:
The PPF maturity amount should be considered part of the Cash Bucket 1 and then rebalanced into the other buckets as needed. Any new allocation into Bucket 2 should be left in PPF.
Read more here: How to plan for retirement using the bucket approach?
We consider the case of a salaried investor who started a PPF account in their 20s or 30s. There are a few considerations that must be noted:
The right way forward will be to use the āEarnings year leftā section in the goal-based investing template to ensure that you are realistically modelling the number of years you will have income.
We consider the hypothetical case of a doctor in their mid-50s who does not have a defined retirement date due to the nature of their profession. However, just because they can, it may not mean that they will be working at their current pace for the next 10-15 years. If major expenses are not planned in the next five years, then the investor should invest a part of their PPF proceeds into equity only if the asset allocation allows it.
NRIs cannot extend the PPF account post-maturity, so they need to reinvest in other investments.
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This post titled Should you renew your PPF account or invest in mutual funds? first appeared on 16 Mar 2022 at https://arthgyaan.com